Can the trustee of your discretionary ‘family’ trust make a distribution to itself?

The short answer to this question, is maybe. It all depends on the terms of the trust deed.

In particular, it will depend on the whether the trustee falls within the definition of a ‘beneficiary’ of the trust. It will also depend on whether the trust deed specifically excludes the trustee from benefiting.

To start with, most discretionary trusts define the range of potential beneficiaries very widely, i.e. to include your family members, as well as all of the companies and other trusts in which your family is involved. So if a family member is the trustee, or if a family company is the corporate trustee, then the trustee will fall within the range of potential beneficiaries.

You then need to look to whether the trustee is specifically excluded from benefiting from the trust. For example, the trust deed may define a category of ‘excluded persons’ who would ordinarily fall within the class of beneficiaries, but who are nevertheless excluded.

The range of persons specifically excluded from benefiting from the trust usually includes the ‘settlor’ of the trust (i.e. the person who set the trust up in the first place), but the trust deed may also specifically include the ‘trustee’ of the trust – or even a former trustee of the trust.

If the ‘trustee’ is specifically excluded, then even if the person or company acting as trustee would otherwise fall within the class of potential beneficiaries, they will not be able to receive an effective distribution of income or capital from the trust.

If the trust minutes purport to make a distribution to an excluded person, then the distribution will be ineffective. This will usually mean that the income that was allocated to the excluded person remains within the trust, and will be taxed to the trustee at the top marginal rate of tax.

You may ask why the trustee would be specifically excluded from benefiting under a family trust? One reason for trusts holding property in NSW is that a change of trustee will only be exempt from stamp duty if the trustee is not able to benefit under the trust. For this reason, many trust deeds set up by lawyers in NSW will exclude the trustee as a matter of course.

Another reason people sometimes exclude a trustee from benefiting is if the trust is set up to benefit a vulnerable person, and the trustee is an unrelated party tasked with looking after that person. By specifically excluding the trustee, the person setting up the trust can be sure that the trust income and assets will be used for the intended purpose, rather than to benefit the unrelated trustee. Where people get into trouble is when the trustee is changed to a related person (or company) and distributions are then made to those related parties, without regard to the fact that the trust deed specifically excludes them from benefiting.

So the take-away is that you should review your trust deed very carefully before attempting to make a distribution of income or capital to the trustee of your trust.

For assistance in making effective trust distributions, call us on 1300 654 590 or email andrew@andreyev.com.au.


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